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CHAPTER
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6
Accounting for Long-Term
Operational Assets
LEARNING OBJECTIVES
After you have mastered the material in this chapter you will be able to:
1
2
3
4
5
6
7
8
9
Identify different types of long-term operational assets.
Determine the cost of long-term operational assets.
Explain how different depreciation methods affect financial statements.
Determine how gains and losses on disposals of long-term operational assets affect financial statements.
Show how revising estimates affects financial statements.
Explain how continuing expenditures for operational assets affect financial statements.
Explain how expense recognition for natural resources (depletion) affects financial statements.
Explain how expense recognition for intangible assets (amortization) affects financial statements.
Understand how expense recognition choices and industry characteristics affect financial performance
measures.
CHAPTER OPENING
Companies use assets to produce revenue. Some assets, like inventory or office supplies, are called current
assets because they are used relatively quickly (within a single accounting period). Other assets, like equipment or buildings, are used for extended periods of time (two or more accounting periods). These assets are
called long-term operational assets.1 Accounting for long-term assets raises several questions. For example,
what is the cost of the asset? Is it the list price only or should the cost of transportation, transit insurance,
1
Classifying assets as current versus long term is explained in more detail in Chapter 7.
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setup, and so on be added to the list price? Should the cost of a long-term asset be recognized as expense
in the period the asset is purchased or should the cost be expensed over the useful life of the asset? What
happens in the accounting records when a long-term asset is retired from use? This chapter answers these
questions. It explains accounting for long-term operational assets from the date of purchase through the date
of disposal.
Curious
The
Accountant
In the normal course of operations, most companies
acquire long-term assets each year. The way in which
a company hopes to make money with these assets
varies according to the type of business and the
asset acquired. During a recent accounting period,
Weyerhaeuser Company made cash acquisitions of
property and equipment of $861 million and cash acquisitions of timber and timberlands of $96 million.
Can you think of how Weyerhaeuser’s use of trees to produce revenue differs from its use of trucks? Do
you think the procedures used to account for timber should be similar to or different from those used to account
for trucks, and if so, how? (Answers on page 213.)
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Chapter 6
TANGIBLE VERSUS INTANGIBLE ASSETS
LO 1
Identify different types of long-term
operational assets.
Long-term assets may be tangible or intangible. Tangible assets have a physical presence; they can be seen and touched. Tangible assets include equipment, machinery,
natural resources, and land. In contrast, intangible assets have no physical form.
Although they may be represented by physical documents, intangible assets are, in
fact, rights or privileges. They cannot be seen or touched. For example, a patent
represents an exclusive legal privilege to produce and sell a particular product. It
protects inventors by making it illegal for others to profit by copying their inventions.
Although a patent may be represented by legal documents, the privilege is the actual
asset. Since the privilege cannot be seen or touched, the patent is an intangible asset.
Tangible Long-Term Assets
Tangible long-term assets are classified as (1) property, plant, and equipment; (2) natural
resources, or (3) land.
Property, Plant, and Equipment
Property, plant, and equipment is sometimes called plant assets or fixed assets. Examples of property, plant, and equipment include furniture, cash registers, machinery,
delivery trucks, computers, mechanical robots, and buildings. The level of detail used
to account for these assets varies. One company may include all office equipment in
one account, whereas another company might divide office equipment into computers,
desks, chairs, and so on. The term used to recognize expense for property, plant, and
equipment is depreciation.
Natural Resources
Mineral deposits, oil and gas reserves, timber stands, coal mines, and stone quarries
are examples of natural resources. Conceptually, natural resources are inventories.
When sold, the cost of these assets is frequently expensed as cost of goods sold.
Although inventories are usually classified as short-term assets, natural resources are
normally classified as long term because the resource deposits generally have long
lives. For example, it may take decades to extract all of the diamonds from a diamond
mine. The term used to recognize expense for natural resources is depletion.
Land
Land is classified separately from other property because land is not subject to depreciation or depletion. Land has an infinite life. It is not worn out or consumed as it
is used. When buildings or natural resources are purchased simultaneously with land,
the amount paid must be divided between the land and the other assets because of
the nondepreciable nature of the land.
Intangible Assets
Intangible assets fall into two categories, those with identifiable useful lives and those
with indefinite useful lives.
Intangible Assets with Identifiable Useful Lives
Intangible assets with identifiable useful lives include patents and copyrights. These
assets may become obsolete (a patent may become worthless if new technology provides a superior product) or may reach the end of their legal lives. The term used
when recognizing expense for intangible assets with identifiable useful lives is called
amortization.
Intangible Assets with Indefinite Useful Lives
The benefits of some intangible assets may extend so far into the future that their
useful lives cannot be estimated. For how many years will the Coca-Cola trademark
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Accounting for Long-Term Operational Assets
211
attract customers? When will the value of a McDonald’s franchise end? There are no
answers to these questions. Intangible assets such as renewable franchises, trademarks,
and goodwill have indefinite useful lives. The costs of such assets are not expensed
unless the value of the assets becomes impaired.
DETERMINING THE COST OF LONG-TERM ASSETS
The historical cost concept requires that an asset be recorded at the amount paid for
it. This amount includes the purchase price plus any costs necessary to get the asset
in the location and condition for its intended use. Common cost components are:
■ Buildings: (1) purchase price, (2) sales taxes, (3) title search and transfer document
costs, (4) realtor’s and attorney’s fees, and (5) remodeling costs.
■ Land: (1) purchase price, (2) sales taxes, (3) title search and transfer document
costs, (4) realtor’s and attorney’s fees, (5) costs for removal of old buildings, and
(6) grading costs.
■ Equipment: (1) purchase price (less discounts), (2) sales taxes, (3) delivery costs,
(4) installation costs, and (5) costs to adapt for intended use.
The cost of an asset does not include payments for fines, damages, and so on that could
have been avoided.
CHECK
Yourself
6.1
Sheridan Construction Company purchased a new bulldozer that had a $260,000 list price.
The seller agreed to allow a 4 percent cash discount in exchange for immediate payment.
The bulldozer was delivered FOB shipping point at a cost of $1,200. Sheridan hired a new
employee to operate the dozer for an annual salary of $36,000. The employee was trained
to operate the dozer for a one-time training fee of $800. The cost of the company’s theft
insurance policy increased by $300 per year as a result of adding the dozer to the policy.
The dozer had a five-year useful life and an expected salvage value of $26,000. Determine
the asset’s cost.
Answer
List price
Less: Cash discount ($260,000 3 0.04)
Shipping cost
Training cost
Total asset cost (amount capitalized)
$260,000
(10,400)
1,200
800
$251,600
Basket Purchase Allocation
Acquiring a group of assets in a single transaction is known as a basket purchase. The
total price of a basket purchase must be allocated among the assets acquired. Accountants commonly allocate the purchase price using the relative fair market value method.
To illustrate, assume that Beatty Company purchased land and a building for $240,000
cash. A real estate appraiser determined the fair market value of each asset to be
Building
Land
Total
$270,000
90,000
$360,000
LO 2
Determine the cost of long-term
operational assets.
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Chapter 6
The appraisal indicates that the land is worth 25 percent ($90,000 4 $360,000) of the
total value and the building is worth 75 percent ($270,000 4 $360,000). Using these
percentages, the actual purchase price is allocated as follows.
Building
Land
Total
0.75 3 $240,000 5
0.25 3 $240,000 5
$180,000
60,000
$240,000
METHODS OF RECOGNIZING DEPRECIATION EXPENSE
The life cycle of an operational asset involves (1) acquiring the funds to buy the asset,
(2) purchasing the asset, (3) using the asset, and (4) retiring (disposing of) the asset.
These stages are illustrated in Exhibit 6.1. The stages involving (1) acquiring funds and
(2) purchasing assets have been discussed previously. This section of the chapter
Explain how different depreciation
describes how accountants recognize the use of assets (Stage 3). As they are used, assets
methods affect financial
statements.
suffer from wear and tear called depreciation. Ultimately, assets depreciate to the point
that they are no longer useful in the process of earning revenue. This process usually
takes several years. The amount of an asset’s cost that is allocated to
expense during an accounting period is called depreciation expense.
EXHIBIT 6.1
An asset that is fully depreciated by one company may still be useful
to another company. For example, a rental car that is no longer useful
Life Cycle of an Operational Asset
to Hertz may still be useful to a local delivery company. As a result,
companies are frequently able to sell their fully depreciated assets to
Acquire
other companies or individuals. The expected market value of a fully
funding
depreciated asset is called its salvage value. The total amount of depreciation a company recognizes for an asset, its depreciable cost, is the
difference between its original cost and its salvage value.
Buy
Retire
asset
asset
For example, assume a company purchases an asset for $5,000. The
company expects to use the asset for 5 years (the estimated useful life)
and then to sell it for $1,000 (salvage value). The depreciable cost of
Use
the asset is $4,000 ($5,000 2 $1,000). The portion of the depreciable
asset
cost ($4,000) that represents its annual usage is recognized as depreciation expense.
Accountants must exercise judgment to estimate the amount of
depreciation expense to recognize each period. For example, suppose
EXHIBIT 6.2
you own a personal computer. You know how much the computer cost,
and you know you will eventually need to replace it. How would you
Depreciation Methods Used by
determine the amount the computer depreciates each year you use it?
U.S. Companies
Businesses may use any of several acceptable methods to estimate the
amount of depreciation expense to recognize each year.
Other
The method used to recognize depreciation expense should match
1%
the asset’s usage pattern. More expense should be recognized in periods
Units-of-production
when the asset is used more and less in periods when the asset is used
7%
less. Since assets are used to produce revenue, matching expense recogAccelerated
nition with asset usage also matches expense recognition with revenue
14%
recognition. Three alternative methods for recognizing depreciation
expense are (1) straight-line, (2) double-declining-balance, and (3) unitsof-production.
The straight-line method produces the same amount of depreciation
expense each accounting period. Double-declining-balance, an accelerated
method, produces more depreciation expense in the early years of an asset’s
Straight-line
life, with a declining amount of expense in later years. Units-of-production
78%
produces varying amounts of depreciation expense in different accounting
periods (more in some accounting periods and less in others). Exhibit 6.2
Data Source: AICPA Accounting Trends and
Techniques.
contrasts the different depreciation methods that U.S. companies use.
LO 3
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Accounting for Long-Term Operational Assets
Curious
Answers to The
213
Equipment is a long-term asset used
Accountant
for the purpose of producing revenue.
A portion of the equipment’s cost is
recognized as depreciation expense
each accounting period. The expense recognition for the cost of equipment is therefore spread over the useful life of the asset. Timber, however, is not used until the trees are grown. Conceptually, the costs of the trees
should be treated as inventories and expensed as cost of goods sold at the time the products made from trees
are sold. Even so, some timber companies recognize a periodic charge called depletion in a manner similar to
that used for depreciation.
Accounting for unusual long-term assets such as timber requires an understanding of specialized “industry practice” accounting rules that are beyond the scope of this course. Many industries have unique accounting problems, and business managers in such industries must understand specialized accounting rules that
relate to their companies.
Dryden Enterprises Illustration
To illustrate the different depreciation methods, consider a van purchased by
Dryden Enterprises. Dryden plans to use the van as rental property. The van had
a list price of $23,500. Dryden obtained a 10 percent cash discount from the dealer.
The van was delivered FOB shipping point, and Dryden paid an additional $250
for transportation costs. Dryden also paid $2,600 for a custom accessory package
to increase the van’s appeal as a rental vehicle. The cost of the van is computed
as follows.
List price
Less: Cash discount
Plus: Transportation costs
Plus: Cost of customization
Total
$23,500
(2,350)
250
2,600
$24,000
$23,500 3 0.10
The van has an estimated salvage value of $4,000 and an estimated useful life of
four years. The following section examines three different patterns of expense recognition for this van.
Straight-Line Depreciation
The first scenario assumes the van is used evenly over its four-year life. The revenue
from renting the van is assumed to be $8,000 per year. The matching concept calls
for the expense recognition pattern to match the revenue stream. Since the same
amount of revenue is recognized in each accounting period, Dryden should use
straight-line depreciation because it produces equal amounts of depreciation expense
each year.
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Chapter 6
Life Cycle Phase 1
The first phase of the asset life cycle is to acquire funds to purchase the asset. Assume
Dryden acquired $25,000 cash on January 1, 2008, by issuing common stock. The
effects on the financial statements follow.
5
Assets
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
25,000
1
NA
2
NA
5
25,000
1
NA
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
NA
5
NA
25,000 FA
Life Cycle Phase 2
The second phase of the life cycle is to purchase the van. Assume Dryden bought the
van on January 1, 2008, using funds from the stock issue. The cost of the van, previously computed, was $24,000 cash. The effects on the financial statements are:
5
Assets
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
(24,000)
1
24,000
2
NA
5
NA
1
NA
Rev.
2
Exp.
5
Net Inc.
NA
2
NA
5
NA
Cash Flow
(24,000)
IA
Life Cycle Phase 3
Dryden used the van by renting it to customers. The rent revenue each year is $8,000
cash. The effects on the financial statements are shown next.
5
Assets
Rev.
2
Exp.
5
Net Inc.
8,000
2
NA
5
8,000
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
8,000
1
NA
2
NA
5
NA
1
8,000
Cash Flow
8,000
OA
Although illustrated only once, these effects occur four times—once for each year
Dryden earns revenue by renting the van.
At the end of each year, Dryden adjusts its accounts to recognize depreciation
expense. The amount of depreciation recognized using the straight-line method is calculated as follows.
(Asset cost 2 Salvage value) 4 Useful life 5 Depreciation expense
($24,000 2 $4,000)
4
4 years
5
$5,000 per year
Recognizing depreciation expense is an asset use transaction that reduces assets
and equity. The asset reduction is reported using a contra asset account called Accumulated Depreciation. Recognizing depreciation expense does not affect cash flow. The
entire cash outflow for this asset occurred in January 2008 when Dryden purchased
the van. Depreciation reflects using tangible assets, not spending cash to purchase
them. The effects on the financial statements are as follows.
5
Assets
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
NA
1
NA
2
5,000
5
NA
1
(5,000)
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
5,000
5
(5,000)
NA
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215
The Depreciation Expense account, like other expense accounts, is closed to the
Retained Earnings account at the end of each year. The Accumulated Depreciation
account, in contrast, increases each year, accumulating the total amount of depreciation recognized on the asset to date.
Life Cycle Phase 4
The final stage in the life cycle of a tangible asset is its disposal and removal from
the company’s records. Dryden retired the van from service on January 1, 2012, selling it for $4,500 cash. The van’s book value (cost 2 accumulated depreciation) when
it was sold was $4,000 ($24,000 cost 2 $20,000 accumulated depreciation), so Dryden
recognized a $500 gain ($4,500 2 $4,000) on the sale.
Gains are like revenues in that they increase assets or decrease liabilities. Gains
are unlike revenues in that gains result from peripheral (incidental) transactions rather
than routine operating activities. Dryden is not in the business of selling vans. Dryden’s
normal business activity is renting vans. Since selling vans is incidental to Dryden’s
normal operations, gains are reported separately, after operating income, on the income
statement.
If Dryden had sold the asset for less than book value, the company would have
recognized a loss on the asset disposal. Losses are similar to expenses in that they
decrease assets or increase liabilities. However, like gains, losses result from peripheral transactions. Losses are also reported as nonoperating items on the income
statement.
The effects of the asset disposal on the financial statements are shown next.
5
Assets
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
4,500
1
(24,000)
2
(20,000)
5
NA
1
500
LO 4
Determine how gains and losses on
disposals of long-term operational
assets affect financial statements.
Rev. or
Gain
2
Exp. or
Loss
5
Net Inc.
Cash Flow
500
2
NA
5
500
4,500 IA
Although the gain reported on the 2012 income statement is $500, the cash inflow
from selling the van is $4,500. Gains and losses are not reported on the statement of
cash flows. Instead they are included in the total amount of cash collected from the
sale of the asset. In this case, the entire $4,500 is shown in the cash flow from investing activities section of the 2012 statement of cash flows.
Financial Statements
Exhibit 6.3 displays a vertical statements model that shows the financial results for
the Dryden illustration from 2008 through 2012. Study the exhibit until you understand how all the figures were derived. The amount of depreciation expense ($5,000)
reported on the income statement is constant each year from 2008 through 2011.
The amount of accumulated depreciation reported on the balance sheet grows from
$5,000 to $10,000, to $15,000, and finally to $20,000. The Accumulated Depreciation
account is a contra asset account that is subtracted from the Van account in determining total assets.
Study the timing differences between cash flow and net income. Dryden spent
$24,000 cash to acquire the van. Over the van’s life cycle, Dryden collected $36,500
[($8,000 revenue 3 4 years 5 $32,000) plus ($4,500 from the asset disposal) 5 $36,500].
The $12,500 difference between the cash collected and the cash paid ($36,500 2
$24,000) equals the total net income earned during the van’s life cycle.
Although the amounts are the same, the timing of the cash flows and the income
recognition are different. For example, in 2008 there was a $24,000 cash outflow to
purchase the van and an $8,000 cash inflow from customers. In contrast, the income
statement reports net income of $3,000. In 2012, Dryden reported a $500 gain on the
asset disposal, but the amount of operating income and the cash flow from operating
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Chapter 6
EXHIBIT 6.3
Financial Statements under Straight-Line Depreciation
DRYDEN ENTERPRISES
Financial Statements
2008
2009
2010
2011
2012
Income Statements
Rent revenue
Depreciation expense
Operating income
Gain on sale of van
Net income
$ 8,000
(5,000)
3,000
0
$ 3,000
$ 8,000
(5,000)
3,000
0
$ 3,000
$ 8,000
(5,000)
3,000
0
$ 3,000
$ 8,000
(5,000)
3,000
0
$ 3,000
$
$
0
0
0
500
500
Balance Sheets
Assets
Cash
Van
Accumulated depreciation
Total assets
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
$ 9,000
24,000
(5,000)
$28,000
$17,000
24,000
(10,000)
$31,000
$25,000
24,000
(15,000)
$34,000
$33,000
24,000
(20,000)
$37,000
$37,500
0
0
$37,500
$25,000
3,000
$28,000
$25,000
6,000
$31,000
$25,000
9,000
$34,000
$25,000
12,000
$37,000
$25,000
12,500
$37,500
$ 8,000
$
Statements of Cash Flows
Operating Activities
Inflow from customers
Investing Activities
Outflow to purchase van
Inflow from sale of van
Financing Activities
Inflow from stock issue
Net Change in Cash
Beginning cash balance
Ending cash balance
$ 8,000
$ 8,000
$ 8,000
0
(24,000)
4,500
25,000
9,000
0
$ 9,000
8,000
9,000
$17,000
8,000
17,000
$25,000
8,000
25,000
$33,000
4,500
33,000
$37,500
activities is zero for that year. The gain is only indirectly related to cash flows. The
$4,500 of cash received on disposal is reported as a cash inflow from investing activities. Since gains and losses result from peripheral transactions, they do not affect
operating income or cash flow from operating activities.
Double-Declining-Balance Depreciation
LO 3
Explain how different depreciation
methods affect financial
statements.
For the second scenario, assume demand for the van is strong when it is new, but
fewer people rent the van as it ages. As a result, the van produces smaller amounts
of revenue as time goes by. To match expenses with revenues, it is reasonable to recognize more depreciation expense in the van’s early years and less as it ages.
Double-declining-balance depreciation produces a large amount of depreciation in
the first year of an asset’s life and progressively smaller levels of expense in each succeeding year. Since the double-declining-balance method recognizes depreciation
expense more rapidly than the straight-line method does, it is called an accelerated
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Accounting for Long-Term Operational Assets
depreciation method. Depreciation expense recognized using double-declining-balance
is computed in three steps.
1. Determine the straight-line rate. Divide one by the asset’s useful life. Since the estimated useful life of Dryden’s van is four years, the straight-line rate is 25 percent
(1 4 4) per year.
2. Determine the double-declining-balance rate. Multiply the straight-line rate by
2 (double the rate). The double-declining-balance rate for the van is 50 percent
(25 percent 3 2).
3. Determine the depreciation expense. Multiply the double-declining-balance rate by
the book value of the asset at the beginning of the period (recall that book value
is historical cost minus accumulated depreciation). The following table shows the
amount of depreciation expense Dryden will recognize over the van’s useful life
(2008–2011).
Year
Book Value
at Beginning
of Period
2008
2009
2010
2011
($24,000 2 $
0)
( 24,000 2 12,000)
( 24,000 2 18,000)
( 24,000 2 20,000)
Double the
Annual
Straight-Line
Depreciation
3
Rate
5
Expense
3
3
3
3
0.50
0.50
0.50
0.50
5 $12,000
5 6,000
5 3,000 2,000
5 2,000
0
Regardless of the depreciation method used, an asset cannot be depreciated below
its salvage value. This restriction affects depreciation computations for the third and
fourth years. Because the van had a cost of $24,000 and a salvage value of $4,000,
the total amount of depreciable cost (historical cost 2 salvage value) is $20,000
($24,000 2 $4,000). Since $18,000 ($12,000 1 $6,000) of the depreciable cost is
recognized in the first two years, only $2,000 ($20,000 2 $18,000) remains to be recognized after the second year. Depreciation expense recognized in the third year is
therefore $2,000 even though double-declining-balance computations suggest that
$3,000 should be recognized. Similarly, zero depreciation expense is recognized in the
fourth year even though the computations indicate a $2,000 charge.
CHECK
Yourself
6.2
Olds Company purchased an asset that cost $36,000 on January 1, 2010. The asset had
an expected useful life of five years and an estimated salvage value of $5,000. Assuming
Olds uses the double-declining-balance method, determine the amount of depreciation
expense and the amount of accumulated depreciation Olds would report on the 2012
financial statements.
Answer
Year
Double the
Annual
Book Value at
Straight-Line
Depreciation
Beginning of Period 3
Rate*
5 Expense
2010
($36,000 2 $
0) 3
0.40
5
2011
( 36,000 2 14,400) 3
0.40
5
2012
( 36,000 2 23,040) 3
0.40
5
Total accumulated depreciation at December 31, 2012
$14,400
8,640
5,184
$28,224
*Double-declining-balance rate 5 2 3 Straight-line rate 5 2 3 (1 4 5 years) 5 0.40
217
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Chapter 6
EXHIBIT 6.4
Financial Statements under Double-Declining-Balance Depreciation
DRYDEN ENTERPRISES
Financial Statements
2008
2009
2010
2011
2012
Income Statements
Rent revenue
Depreciation expense
Operating income
Gain on sale of van
Net income
$15,000
(12,000)
3,000
0
$ 3,000
$ 9,000
(6,000)
3,000
0
$ 3,000
$ 5,000
(2,000)
3,000
0
$ 3,000
$ 3,000
0
3,000
0
$ 3,000
$
$
0
0
0
500
500
Balance Sheets
Assets
Cash
Van
Accumulated depreciation
Total assets
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
$16,000
24,000
(12,000)
$28,000
$25,000
24,000
(18,000)
$31,000
$30,000
24,000
(20,000)
$34,000
$33,000
24,000
(20,000)
$37,000
$37,500
0
0
$37,500
$25,000
3,000
$28,000
$25,000
6,000
$31,000
$25,000
9,000
$34,000
$25,000
12,000
$37,000
$25,000
12,500
$37,500
$ 3,000
$
Statements of Cash Flows
Operating Activities
Inflow from customers
Investing Activities
Outflow to purchase van
Inflow from sale of van
Financing Activities
Inflow from stock issue
Net Change in Cash
Beginning cash balance
Ending cash balance
$15,000
$ 9,000
$ 5,000
0
(24,000)
4,500
25,000
16,000
0
$16,000
9,000
16,000
$25,000
5,000
25,000
$30,000
3,000
30,000
$33,000
4,500
33,000
$37,500
Effects on the Financial Statements
Exhibit 6.4 displays financial statements for the life of the asset assuming Dryden
uses double-declining-balance depreciation. The illustration assumes a cash revenue
stream of $15,000, $9,000, $5,000, and $3,000 for the years 2008, 2009, 2010, and
2011, respectively. Trace the depreciation expense from the table above to the income
statements. Reported depreciation expense is greater in the earlier years and smaller
in the later years of the asset’s life.
The double-declining-balance method smooths the amount of net income reported
over the asset’s useful life. In the early years, when heavy asset use produces higher
revenue, depreciation expense is also higher. Similarly, in the later years, lower levels
of revenue are matched with lower levels of depreciation expense. Net income is constant at $3,000 per year.
The depreciation method a company uses does not affect how it acquires the
financing, invests the funds, and retires the asset. For Dryden’s van, the accounting
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219
effects of these life cycle phases are the same as under the straight-line approach.
Similarly, the recording procedures are not affected by the depreciation method.
Different depreciation methods affect only the amounts of depreciation expense
recorded each year, not which accounts are used.
Units-of-Production Depreciation
Suppose rental demand for Dryden’s van depends on general economic conditions.
In a robust economy, travel increases, and demand for renting vans is high. In a
stagnant economy, demand for van rentals declines. In such circumstances, revenues
fluctuate from year to year. To accomplish the matching objective, depreciation
should also fluctuate from year to year. A method of depreciation known as unitsof-production depreciation accomplishes this goal by basing depreciation expense on
actual asset usage.
Computing depreciation expense using units-of-production begins with identifying a measure of the asset’s productive capacity. For example, the number of miles
Dryden expects its van to be driven may be a reasonable measure of its productive
capacity. If the depreciable asset were a saw, an appropriate measure of productive
capacity could be the number of board feet the saw was expected to cut during its
useful life. In other words, the basis for measuring production depends on the nature
of the depreciable asset.
To illustrate computing depreciation using the units-of-production depreciation
method, assume that Dryden measures productive capacity based on the total number
of miles the van will be driven over its useful life. Assume Dryden estimates this
productive capacity to be 100,000 miles. The first step in determining depreciation
expense is to compute the cost per unit of production. For Dryden’s van, this amount
is total depreciable cost (historical cost 2 salvage value) divided by total units of
expected productive capacity (100,000 miles). The depreciation cost per mile is therefore $0.20 ([$24,000 cost 2 $4,000 salvage] 4 100,000 miles). Annual depreciation
expense is computed by multiplying the cost per mile by the number of miles driven.
Odometer readings indicate the van was driven 40,000 miles, 20,000 miles, 30,000
miles, and 15,000 miles in 2008, 2009, 2010, and 2011, respectively. Dryden developed
the following schedule of depreciation charges.
Year
Cost per Mile
(a)
Miles Driven
(b)
Depreciation Expense
(a 3 b)
2008
2009
2010
2011
$.20
.20
.20
.20
40,000
20,000
30,000
15,000
$8,000
4,000
6,000
3,000 2,000
As pointed out in the discussion of the double-declining-balance method, an asset
cannot be depreciated below its salvage value. Since $18,000 of the $20,000 ($24,000
cost 2 $4,000 salvage) depreciable cost is recognized in the first three years of using
the van, only $2,000 ($20,000 2 $18,000) remains to be charged to depreciation in
the fourth year, even though the depreciation computations suggest the charge should
be $3,000. As the preceding table indicates, the general formula for computing unitsof-production depreciation is
Units of production
Annual
Cost 2 Salvage value
3
in current
5 depreciation
Total estimated units of production
year
expense
LO 3
Explain how different depreciation
methods affect financial
statements.
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Chapter 6
EXHIBIT 6.5
Financial Statements under Units-of-Production Depreciation
DRYDEN ENTERPRISES
Financial Statements
2008
2009
2010
2011
2012
Income Statements
Rent revenue
Depreciation expense
Operating income
Gain on sale of van
Net income
$11,000
(8,000)
3,000
0
$ 3,000
$ 7,000
(4,000)
3,000
0
$ 3,000
$ 9,000
(6,000)
3,000
0
$ 3,000
$ 5,000
(2,000)
3,000
0
$ 3,000
$
$
0
0
0
500
500
Balance Sheets
Assets
Cash
Van
Accumulated depreciation
Total assets
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
$12,000
24,000
(8,000)
$28,000
$19,000
24,000
(12,000)
$31,000
$28,000
24,000
(18,000)
$34,000
$33,000
24,000
(20,000)
$37,000
$37,500
0
0
$37,500
$25,000
3,000
$28,000
$25,000
6,000
$31,000
$25,000
9,000
$34,000
$25,000
12,000
$37,000
$25,000
12,500
$37,500
$ 5,000
$
Statements of Cash Flows
Operating Activities
Inflow from customers
Investing Activities
Outflow to purchase van
Inflow from sale of van
Financing Activities
Inflow from stock issue
Net Change in Cash
Beginning cash balance
Ending cash balance
$11,000
$ 7,000
$ 9,000
0
(24,000)
4,500
25,000
12,000
0
$12,000
7,000
12,000
$19,000
9,000
19,000
$28,000
5,000
28,000
$33,000
4,500
33,000
$37,500
Exhibit 6.5 displays financial statements that assume Dryden uses units-ofproduction depreciation. The exhibit assumes a cash revenue stream of $11,000,
$7,000, $9,000, and $5,000 for 2008, 2009, 2010, and 2011, respectively. Trace the
depreciation expense from the schedule above to the income statements. Depreciation
expense is greater in years the van is driven more and smaller in years the van is
driven less, providing a reasonable matching of depreciation expense with revenue
produced. Net income is again constant at $3,000 per year.
Comparing the Depreciation Methods
LO 3
Explain how different depreciation
methods affect financial
statements.
The total amount of depreciation expense Dryden recognized using each of the three
methods was $20,000 ($24,000 cost 2 $4,000 salvage value). The different methods
affect the timing, but not the total amount, of expense recognized. The different methods simply assign the $20,000 to different accounting periods. Exhibit 6.6 presents
graphically the differences among the three depreciation methods discussed above. A
company should use the method that most closely matches expenses with revenues.
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EXHIBIT 6.6
Depreciation Expense under Different Depreciation Methods
$ (in thousands) 12
10
8
6
Straight-line depreciation
$5,000 + $5,000 + $5,000 + $5,000 = $20,000
4
Units-of-production depreciation
$8,000 + $4,000 + $6,000 + $2,000 = $20,000
2
0
1
2
3
Double-declining-balance depreciation
4 $12,000 + $6,000 + $2,000 + $0 = $20,000
Years
REVISION OF ESTIMATES
In order to report useful financial information on a timely basis, accountants must
make many estimates of future results, such as the salvage value and useful life of
depreciable assets and uncollectible accounts expense. Estimates are frequently revised
when new information surfaces. Because revisions of estimates are common, generally
accepted accounting principles call for incorporating the revised information into
present and future calculations. Prior reports are not corrected.
To illustrate, assume that McGraw Company purchased a machine on January 1,
2010, for $50,000. McGraw estimated the machine would have a useful life of 8 years
and a salvage value of $3,000. Using the straight-line method, McGraw determined
the annual depreciation charge as follows:
($50,000 2 $3,000) 4 8 years 5 $5,875 per year
At the beginning of the fifth year, accumulated depreciation on the machine is
$23,500 ($5,875 3 4). The machine’s book value is $26,500 ($50,000 2 $23,500). At
this point, what happens if McGraw changes its estimates of useful life or the salvage
value? Consider the following revision examples independently of each other.
Revision of Life
Assume McGraw revises the expected life to 14, rather than 8, years. The machine’s
remaining life would then be 10 more years instead of 4 more years. Assume salvage
value remains $3,000. Depreciation for each remaining year is:
($26,500 book value 2 $3,000 salvage) 4 10-year remaining life 5 $2,350
Revision of Salvage
Alternatively, assume the original expected life remained 8 years, but McGraw revised
its estimate of salvage value to $6,000. Depreciation for each of the remaining four
years would be
($26,500 book value 2 $6,000 salvage) 4 4-year remaining life 5 $5,125
The revised amounts are determined for the full year, regardless of when McGraw
revised its estimates. For example, if McGraw decides to change the estimated useful
life on October 1, 2015, the change would be effective as of January 1, 2015. The
year-end adjusting entry for depreciation would include a full year’s depreciation calculated on the basis of the revised estimated useful life.
LO 5
Show how revising estimates
affects financial statements.
221
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Chapter 6
CONTINUING EXPENDITURES FOR PLANT ASSETS
Most plant assets require additional expenditures for maintenance or improvement
during their useful lives. Accountants must determine if these expenditures should be
expensed or capitalized (recorded as assets).
LO 6
Explain how continuing
expenditures for operational assets
affect financial statements.
Costs That Are Expensed
The costs of routine maintenance and minor repairs that are incurred to keep an asset
in good working order are expensed in the period in which they are incurred. Because
they reduce net income when incurred, accountants often call repair and maintenance
costs revenue expenditures (companies subtract them from revenue).
With respect to the previous example, assume McGraw spent $500 for routine lubrication and to replace minor parts. The effects on the financial statements follow.
Assets
5
Cash
5
Com. Stk.
1
Ret. Earn.
(500)
5
NA
1
(500)
Equity
Rev.
2
Exp.
5
Net Inc.
NA
2
500
5
(500)
Cash Flow
(500)
OA
Costs That Are Capitalized
Substantial amounts spent to improve the quality or extend the life of an asset are
described as capital expenditures. Capital expenditures are accounted for in one of
two ways, depending on whether the cost incurred improves the quality or extends the
life of the asset.
Improving Quality
Expenditures such as adding air conditioning to an existing building or installing a
trailer hitch on a vehicle improve the quality of service these assets provide. If a
capital expenditure improves an asset’s quality, the amount is added to the historical
cost of the asset. The additional cost is expensed through higher depreciation charges
over the asset’s remaining useful life.
To demonstrate, return to the McGraw Company example. Recall that the machine
originally cost $50,000, had an estimated salvage of $3,000, and had a predicted life
of 8 years. Recall further that accumulated depreciation at the beginning of the fifth
year is $23,500 ($5,875 3 4) so the book value is $26,500 ($50,000 2 $23,500). Assume
McGraw makes a major expenditure of $4,000 in the machine’s fifth year to improve
its productive capacity. The effects on the financial statements follow.
5
Assets
Equity
Cash
1
Mach.
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
(4,000)
1
4,000
2
NA
5
NA
1
NA
Rev.
2
Exp.
5
Net Inc.
NA
2
NA
5
NA
Cash Flow
(4,000)
IA
After recording the expenditure, the machine account balance is $54,000 and the
asset’s book value is $30,500 ($54,000 2 $23,500). The depreciation charges for each
of the remaining four years are
($30,500 book value 2 $3,000 salvage) 4 4-year remaining life 5 $6,875
Extending Life
Expenditures such as replacing the roof of an existing building or putting a new
engine in an older vehicle extend the useful life of these assets. If a capital expenditure
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223
extends the life of an asset rather than improving the asset’s quality of service, accountants view the expenditure as canceling some of the depreciation previously charged to
expense. The event is still an asset exchange; cash decreases, and the book value of
the machine increases. However, the increase in the book value of the machine results
from reducing the balance in the contra asset account, Accumulated Depreciation.
To illustrate, assume that instead of increasing productive capacity, McGraw’s
$4,000 expenditure had extended the useful life of the machine by two years. The
effects of the expenditure on the financial statements follow.
5
Assets
Equity
Cash
1
Mach.
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
(4,000)
1
NA
2
(4,000)
5
NA
1
NA
Rev.
2
Exp.
5
Net Inc.
NA
2
NA
5
NA
After the expenditure is recognized, the book value is the same as if the $4,000
had been added to the Machine account ($50,000 cost 2 $19,500 adjusted balance in
Accumulated Depreciation 5 $30,500). Depreciation expense for each of the remaining six years follows.
($30,500 book value 2 $3,000 salvage) 4 6-year remaining life 5 $4,583
CHECK
Yourself
6.3
On January 1, 2010, Dager Inc. purchased an asset that cost $18,000. It had a five-year
useful life and a $3,000 salvage value. Dager uses straight-line depreciation. On January 1,
2012, it incurred a $1,200 cost related to the asset. With respect to this asset, determine
the amount of expense and accumulated depreciation Dager would report in the 2012
financial statements under each of the following assumptions.
1. The $1,200 cost was incurred to repair damage resulting from an accident.
2. The $1,200 cost improved the operating capacity of the asset. The total useful life and salvage
value remained unchanged.
3. The $1,200 cost extended the useful life of the asset by one year. The salvage value remained
unchanged.
Answer
1. Dager would report the $1,200 repair cost as an expense. Dager would also report depreciation
expense of $3,000 ([$18,000 2 $3,000] 4 5). Total expenses related to this asset in 2012 would
be $4,200 ($1,200 repair expense 1 $3,000 depreciation expense). Accumulated depreciation at
the end of 2012 would be $9,000 ($3,000 depreciation expense 3 3 years).
2. The $1,200 cost would be capitalized in the asset account, increasing both the book value of
the asset and the annual depreciation expense.
After Effects of
Capital Improvement
Amount in asset account ($18,000 1 $1,200)
Less: Salvage value
Accumulated depreciation on January 1, 2012
Remaining depreciable cost before recording 2012 depreciation
Depreciation for 2012 ($10,200 4 3 years)
Accumulated depreciation at December 31, 2012 ($6,000 1 $3,400)
$19,200
(3,000)
(6,000)
$10,200
$ 3,400
$ 9,400
(continued)
Cash Flow
(4,000)
IA
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3. The $1,200 cost would be subtracted from the Accumulated Depreciation account, increasing
the book value of the asset. The remaining useful life would increase to four years, which
would decrease the depreciation expense.
After Effects of
Capital Improvement
Amount in asset account
Less: Salvage value
Accumulated depreciation on January 1, 2012 ($6,000 2 $1,200)
Remaining depreciable cost before recording 2012 depreciation
Depreciation for 2012 ($10,200 4 4 years)
Accumulated depreciation at December 31, 2012 ($4,800 1 $2,550)
$18,000
(3,000)
(4,800)
$10,200
$ 2,550
$ 7,350
NATURAL RESOURCES
LO 7
Explain how expense recognition
for natural resources (depletion)
affects financial statements.
The cost of natural resources includes not only the purchase price but also related
items such as the cost of exploration, geographic surveys, and estimates. The process
of expensing natural resources is commonly called depletion.2 The most common
method used to calculate depletion is units-of-production.
To illustrate, assume Apex Coal Mining paid $4,000,000 cash to purchase a mine
with an estimated 16,000,000 tons of coal. The unit depletion charge is
$4,000,000 4 16,000,000 tons 5 $0.25 per ton
If Apex mines 360,000 tons of coal in the first year, the depletion charge is:
360,000 tons 3 $0.25 per ton 5 $90,000
The depletion of a natural resource has the same effect on the accounting equation as other expense recognition events. Assets (in this case, a coal mine) and stockholders’ equity decrease. The depletion expense reduces net income. The effects on
the financial statements follow.
5
Assets
Equity
Rev.
2
Exp.
5
Net Inc.
Cash
1
Coal Mine
5
Com. Stk.
1
Ret. Earn.
(4,000,000)
1
4,000,000
5
NA
1
NA
NA
2
NA
5
NA
NA
1
(90,000)
5
NA
1
(90,000)
NA
2
90,000
5
(90,000)
Cash Flow
(4,000,000)
IA
NA
INTANGIBLE ASSETS
LO 8
Explain how expense recognition
for intangible assets (amortization)
affects financial statements.
Intangible assets provide rights, privileges, and special opportunities to businesses. Common intangible assets include trademarks, patents, copyrights, franchises, and goodwill. Some of the unique characteristics of these intangible assets are described in the
following sections.
Trademarks
A trademark is a name or symbol that identifies a company or a product. Familiar
trademarks include the Polo emblem, the name Coca-Cola, and the Nike slogan, “Just
2
In practice, the depletion charge is considered a product cost and allocated between inventory and cost of goods
sold. This text uses the simplifying assumption that all resources are sold in the same accounting period in which
they are extracted. The full depletion charge is therefore expensed in the period in which the resources are extracted.
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do it.” Trademarks are registered with the federal government and have an indefinite
legal lifetime.
The costs incurred to design, purchase, or defend a trademark are capitalized in
an asset account called Trademarks. Companies want their trademarks to become
familiar but also face the risk of a trademark being used as the generic name for a
product. To protect a trademark, companies in this predicament spend large sums on
legal fees and extensive advertising programs to educate consumers. Well-known
trademarks that have been subject to this problem include Coke, Xerox, Kleenex, and
Vaseline.
Patents
A patent grants its owner an exclusive legal right to produce and sell a product that
has one or more unique features. Patents issued by the U.S. Patent Office have a legal
life of 20 years. Companies may obtain patents through purchase, lease, or internal
development. The costs capitalized in the Patent account are usually limited to the
purchase price and legal fees to obtain and defend the patent. The research and development costs that are incurred to develop patentable products are usually expensed in the
period in which they are incurred.
Focus On
INTERNATIONAL ISSUES
U.S. GAAP: A COMPETITIVE DISADVANTAGE?
As discussed earlier in this textbook, the diversity of accounting rules is decreasing
among industrialized nations. This is due in large part to the fact that so many countries require their publicly listed companies to follow the accounting rules of the International Accounting Standards Board (IASB) and the efforts between the FASB and
the IASB to bring their rules into closer agreement. However, there continue to be
areas where significant differences exist between the accounting rules for companies
in the United States and companies in other countries. Furthermore, in the opinion of
the managers of some companies involved in global competition, these differences put
U.S. companies at a competitive disadvantage. Accounting for research and development costs (R&D) is a good example of this situation.
Suppose that Microbiotech, Inc., is a pharmaceutical company that spent $10 million in 2011 on R&D of a new drug. If Microbiotech is a U.S. company, it is required to
expense the $10 million immediately under U.S. GAAP. However, if Microbiotech is a
Japanese company, using Japanese GAAP, it is allowed to capitalize the costs in an
asset account and then expense it gradually, through amortization, over the useful life
of the asset. As a result, in the year the R&D costs are incurred a U.S. company reports
more expense, and less earnings, than its Japanese counterpart.
Some businesspeople believe that U.S. GAAP can put U.S. companies at a competitive disadvantage in the search for
capital. Certainly the rules pertaining to R&D demonstrate how Microbiotech, as a U.S. company, may be required to report
lower earnings in 2011 than if it had been a Japanese company, even though each company is in the same economic position.
South Korea, whose companies present significant competition to U.S. companies, also permits R&D costs to be capitalized.
Keep in mind that well-informed business professionals know how different accounting rules affect a company’s financial
statements. If they believe that U.S. GAAP cause a company’s earnings to be understated, they can take this into consideration
when making business decisions.
Copyrights
A copyright protects writings, musical compositions, works of art, and other intellectual property for the exclusive benefit of the creator or persons assigned the right
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by the creator. The cost of a copyright includes the purchase price and any legal costs
associated with obtaining and defending the copyright. Copyrights granted by the
federal government extend for the life of the creator plus 70 years. A radio commercial could legally use a Bach composition as background music; it could not, however,
use the theme song from the movie, The Matrix, without obtaining permission from
the copyright owner. The cost of a copyright is often expensed early because future
royalties may be uncertain.
Franchises
Franchises grant exclusive rights to sell products or perform services in certain geographic
areas. Franchises may be granted by governments or private businesses. Franchises
granted by governments include federal broadcasting licenses. Private business franchises
include fast-food restaurant chains and brand labels such as Healthy Choice. The legal
and useful lives of a franchise are frequently difficult to determine. Judgment is often
crucial to establishing the estimated useful life for franchises.
Reality
BYTES
On July 24, 2006, a group of three private equity investors offered to pay approximately $21 billion to acquire HCA, one of the nations largest hospital concerns. At
the time, HCA’s balance sheet showed net assets (assets minus liabilities) of approximately $4.9 billion. Why would the investors offer to pay the owners of HCA
four times the value of the assets shown on the company’s balance sheet?
They were willing to pay four times the book value of the assets for at least
two reasons. First, the value of the assets on HCA’s balance sheet represented
the historical cost of the assets. The current market value of many of these
assets was probably higher than their historical cost. Second, the investors
probably believed that HCA had goodwill, which enables a company to generate
above-average earnings from using its assets. In other words, they were agreeing to pay for a hidden asset not shown on HCA’s balance sheet.
Goodwill
Goodwill is the value attributable to favorable factors such as reputation, location, and
superior products. Consider the most popular restaurant in your town. If the owner
sold the restaurant, do you think the purchase price would be simply the total value
of the chairs, tables, kitchen equipment, and building? Certainly not, because much
of the restaurant’s value lies in its popularity; in other words, its ability to generate
a high return is based on the goodwill (reputation) of the business.
Calculating goodwill can be complex; here we present a simple example to illustrate how it is determined. Suppose the accounting records of a restaurant named
Bendigo’s show
Assets 5 Liabilities 1 Stockholders’ Equity
$200,000 5 $50,000 1
$150,000
Assume a buyer agrees to purchase the restaurant by paying the owner $300,000
cash and assuming the existing liabilities. In other words, the restaurant is purchased
at a price of $350,000 ($300,000 cash 1 $50,000 assumed liabilities). Now assume
that the assets of the business (tables, chairs, kitchen equipment, etc.) have a fair
market value of only $280,000. Why would the buyer pay $350,000 to purchase assets
with a market value of $280,000? Obviously, the buyer is purchasing more than just the
assets. The buyer is purchasing the business’s goodwill. The amount of the goodwill
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is the difference between the purchase price and the fair market value of the assets.
In this case, the goodwill is $70,000 ($350,000 2 $280,000). The effects of the purchase on the financial statements of the buyer follow.
Assets
Cash
1
Rest. Assets
1
Goodwill
(300,000)
1
280,000
1
70,000
5
Liab.
1
Equity
Rev.
2
Exp.
5
Net Inc.
5
50,000
1
NA
NA
2
NA
5
NA
Cash Flow
(300,000)
IA
The fair market value of the restaurant assets represents the historical cost to the
new owner. It becomes the basis for future depreciation charges.
EXPENSE RECOGNITION FOR INTANGIBLE ASSETS
As mentioned earlier, intangible assets fall into two categories, those with identifiable
useful lives and those with indefinite useful lives. Expense recognition for intangible
assets depends on which classification applies.
Expensing Intangible Assets with Identifiable Useful Lives
The costs of intangible assets with identifiable useful lives are normally expensed on
a straight-line basis using a process called amortization. An intangible asset should be
amortized over the shorter of two possible time periods: (1) its legal life or (2) its
useful life.
To illustrate, assume that Flowers Industries purchased a newly granted patent
for $44,000 cash. Although the patent has a legal life of 20 years, Flowers estimates
that it will be useful for only 11 years. The annual amortization charge is therefore
$4,000 ($44,000 4 11 years). The effects on the financial statements follow.
5
Assets
Equity
Rev.
2
Exp.
5
Net Inc.
Cash Flow
Cash
1
Patent
5
Com. Stk.
1
Ret. Earn.
(44,000)
1
44,000
5
NA
1
NA
NA
2
NA
5
NA
(44,000) IA
NA
1
(4,000)
5
NA
1
(4,000)
NA
2
4,000
5
(4,000)
NA
Impairment Losses for Intangible Assets with
Indefinite Useful Lives
Intangible assets with indefinite useful lives must be tested for impairment annually.
The impairment test consists of comparing the fair value of the intangible asset to
its carrying value (book value). If the fair value is less than the book value, an impairment loss must be recognized.
To illustrate, return to the example of the Bendigo’s restaurant purchase. Recall
that the buyer of Bendigo’s paid $70,000 for goodwill. Assume the restaurant experiences a significant decline in revenue because many of its former regular customers
are dissatisfied with the food prepared by the new chef. Suppose the decline in revenue
is so substantial that the new owner believes the Bendigo’s name is permanently
impaired. The owner decides to hire a different chef and change the name of the
restaurant. In this case, the business has suffered a permanent decline in value of
goodwill. The company must recognize an impairment loss.
The restaurant’s name has lost its value, but the owner believes the location continues to provide the opportunity to produce above-average earnings. Some, but not
all, of the goodwill has been lost. Assume the fair value of the remaining goodwill is
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Chapter 6
determined to be $40,000. The impairment loss to recognize is $30,000 ($70,000 2
$40,000). The loss reduces the intangible asset (goodwill), stockholder’s equity (retained
earnings), and net income. The statement of cash flows would not be affected. The
effects on the financial statements follow.
Assets
5
Goodwill
5
(30,000)
5
Liab.
1
Equity
Rev.
2
Exp./Loss
5
Net Inc.
Cash Flow
NA
2
30,000
5
(30,000)
NA
Ret. Earn.
NA
1
(30,000)
BALANCE SHEET PRESENTATION
This chapter has explained accounting for the acquisition, expense recognition, and
disposal of a wide range of long-term assets. Exhibit 6.7 illustrates typical balance
sheet presentation of many of the assets discussed.
EXHIBIT 6.7
Balance Sheet Presentation of Operational Assets
Partial Balance Sheet
Long-Term Assets
Plant and equipment
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total plant and equipment
Land
Natural resources
Mineral deposits (Less: Depletion)
Oil reserves (Less: Depletion)
Total natural resources
Intangibles
Patents (Less: Amortization)
Goodwill
Total intangible assets
Total long-term assets
THE FINANCIAL
LO 9
Understand how expense
recognition choices and industry
characteristics affect financial
performance measures.
$4,000,000
(2,500,000)
1,750,000
(1,200,000)
$1,500,000
550,000
$2,050,000
850,000
2,100,000
890,000
2,990,000
38,000
175,000
213,000
$6,103,000
ANALYST
Managers may have differing opinions about which allocation method (straight-line,
accelerated, or units-of-production) best matches expenses with revenues. As a
result, one company may use straight-line depreciation while another company in
similar circumstances uses double-declining-balance. Since the allocation method a
company uses affects the amount of expense it recognizes, analysts reviewing financial statements must consider the accounting procedures companies use in preparing
the statements.
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EFFECT OF JUDGMENT AND ESTIMATION
Assume that two companies, Alpha and Zeta, experience identical economic events
in 2009 and 2010. Both generate revenue of $50,000 and incur cost of goods sold of
$30,000 during each year. In 2009, each company pays $20,000 for an asset with an
expected useful life of five years and no salvage value. How will the companies’ financial statements differ if one uses straight-line depreciation and the other uses the
double-declining-balance method? To answer this question, first compute the depreciation expense for both companies for 2009 and 2010.
If Alpha Company uses the straight-line method, depreciation for 2009 and 2010 is
(Cost 2 Salvage) 4 Useful life 5 Depreciation expense per year
($20,000 2 $0) 4
5
5 years
$4,000
In contrast, if Zeta Company uses the double-declining-balance method, Zeta
recognizes the following amounts of depreciation expense for 2009 and 2010.
2009
2010
(Cost 2 Accumulated
Depreciation)
3
2 3 (Straight-Line Rate)
5
Depreciation
Expense
($20,000 2 $
0)
($20,000 2 $8,000)
3
3
[2 3 (1 4 5)]
[2 3 (1 4 5)]
5
5
$8,000
$4,800
Based on these computations, the income statements for the two companies are:
Income Statements
2009
Sales
Cost of goods sold
Gross margin
Depreciation expense
Net income
2010
Alpha Co.
Zeta Co.
Alpha Co.
Zeta Co.
$50,000
(30,000)
20,000
(4,000)
$16,000
$50,000
(30,000)
20,000
(8,000)
$12,000
$50,000
(30,000)
20,000
(4,000)
$16,000
$50,000
(30,000)
20,000
(4,800)
$15,200
The relevant sections of the balance sheets are
Plant Assets
2009
Assets
Accumulated depreciation
Book value
2010
Alpha Co.
Zeta Co.
Alpha Co.
Zeta Co.
$20,000
(4,000)
$16,000
$20,000
(8,000)
$12,000
$20,000
(8,000)
$12,000
$20,000
(12,800)
$ 7,200
The depreciation method is not the only aspect of expense recognition that can
vary between companies. Companies may also make different assumptions about the
useful lives and salvage values of long-term operational assets. Thus, even if the same
depreciation method is used, depreciation expense may still differ.
229
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Chapter 6
Since the depreciation method and the underlying assumptions regarding useful
life and salvage value affect the determination of depreciation expense, they also affect
the amounts of net income, retained earnings, and total assets. Financial statement
analysis is affected if it is based on ratios that include these items. Previously defined
ratios that are affected include the (1) debt to assets ratio, (2) return on assets ratio,
(3) return on equity ratio, and (4) return on sales ratio.
To promote meaningful analysis, public companies are required to disclose all
significant accounting policies used to prepare their financial statements. This disclosure is usually provided in the footnotes that accompany the financial statements.
EFFECT OF INDUSTRY CHARACTERISTICS
As indicated in previous chapters, industry characteristics affect financial performance
measures. For example, companies in manufacturing industries invest heavily in
machinery while insurance companies rely more on human capital. Manufacturing
companies therefore have relatively higher depreciation charges than insurance companies. To illustrate how the type of industry affects financial reporting, examine
Exhibit 6.8. This exhibit compares the ratio of sales to property, plant, and equipment
for two companies in each of three different industries.
The table indicates that for every $1.00 invested in property, plant, and equipment,
Kelly Services produced $31.91 of sales. In contrast, Cox Communications and United
Airlines produced only $0.73 and $1.31, respectively, for each $1.00 they invested in
operational assets. Does this mean the management of Kelly is doing a better job
than the management of Cox Communications or United Airlines? Not necessarily.
It means that these companies operate in different economic environments. In other
words, it takes significantly more equipment to operate a cable company or an airline
than it takes to operate an employment agency.
Effective financial analysis requires careful consideration of industry characteristics,
accounting policies, and the reasonableness of assumptions such as useful life and
salvage value.
EXHIBIT 6.8
Industry Data Reflecting the Use of Long-Term Tangible Assets
Company
Sales 4 Property,
Plant, and Equipment
Cable Companies
Charter Communications
Cox Communications
0.90
0.73
Airlines
American
United
1.35
1.31
Employment Agencies
Kelly Services
Robert Half
Industry
31.91
30.20
<< A Look Back
This chapter explains that the primary objective of recognizing depreciation is to match
the cost of a long-term tangible asset with the revenues the asset is expected to generate.
The matching concept also applies to natural resources (depletion) and intangible assets
(amortization). The chapter explains how alternative methods can be used to account
for the same event (e.g., straight-line versus double-declining-balance depreciation).
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231
Companies experiencing exactly the same business events could produce different
financial statements. The alternative accounting methods for depreciating, depleting,
or amortizing assets include the (1) straight-line, (2) double-declining-balance, and
(3) units-of-production methods.
The straight-line method produces equal amounts of expense in each accounting
period. The amount of the expense recognized is determined using the formula [(cost 2
salvage) 4 number of years of useful life]. The double-declining-balance method produces proportionately larger amounts of expense in the early years of an asset’s useful
life and increasingly smaller amounts of expense in the later years of the asset’s useful
life. The formula for calculating double-declining-balance depreciation is [book value at
beginning of period 3 (2 3 the straight-line rate)]. The units-of-production method produces expense in direct proportion to the number of units produced during an accounting period. The formula for the amount of expense recognized each period is [(cost 2
salvage) 4 total estimated units of production 5 allocation rate 3 units of production
in current accounting period].
This chapter showed how to account for changes in estimates such as the useful life
or the salvage value of a depreciable asset. Changes in estimates do not affect the
amount of depreciation recognized previously. Instead, the remaining book value of
the asset is expensed over its remaining useful life.
After an asset has been placed into service, companies typically incur further costs
for maintenance, quality improvement, and extensions of useful life. Maintenance costs
are expensed in the period in which they are incurred. Costs that improve the quality of
an asset are added to the cost of the asset, increasing the book value and the amount of
future depreciation charges. Costs that extend the useful life of an asset are subtracted
from the asset’s Accumulated Depreciation account, increasing the book value and the
amount of future depreciation charges.
A Look Forward >>
In Chapter 7 we move from the assets section of the balance sheet to issues in accounting for liabilities.
SELF-STUDY REVIEW PROBLEM
The following information pertains to a machine purchased by Bakersfield Company on January 1, 2010.
Purchase price
Delivery cost
Installation charge
Estimated useful life
Estimated units the machine will produce
Estimated salvage value
$ 63,000
$ 2,000
$ 3,000
8 years
130,000
$ 3,000
The machine produced 14,400 units during 2010 and 17,000 units during 2011.
Required
Determine the depreciation expense Bakersfield would report for 2010 and 2011 using each of
the following methods.
a. Straight-line.
b. Double-declining-balance.
c. Units-of-production.
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Chapter 6
Solution to Requirements a–c.
a. Straight-line
Purchase price
Delivery cost
Installation charge
Total cost of machine
Less: Salvage value
$63,000
2,000
3,000
68,000
(3,000)
$65,000 4 8 5 $8,125 Depreciation per year
$ 8,125
$ 8,125
2010
2011
b. Double-declining-balance
Year
Cost
2
Accumulated Depreciation
at Beginning of Year
3
2 3 S-L Rate
5
Annual
Depreciation
2010
2011
$68,000
68,000
2
2
$
0
17,000
3
3
(2 3 0.125)
(2 3 0.125)
5
5
$17,000
12,750
c. Units-of-production
(1) (Cost 2 Salvage value) 4 Estimated units of production 5 Depreciation cost per unit
produced
$68,000 2 $3,000
5 $0.50 per unit
130,000
(2) Cost per unit 3 Annual units produced 5 Annual depreciation expense
2005
$0.50 3 14,400 5 $7,200
2006
0.50 3 17,000 5 8,500
KEY TERMS
Accelerated depreciation
method 216
Accumulated Depreciation 214
Amortization 210
Basket purchase 211
Book value 215
Capital expenditures 222
Contra asset account 214
Copyright 225
Current assets 208
Depletion 210
Depreciable cost 212
Depreciation 210
Depreciation expense 212
Double-declining-balance
depreciation 216
Estimated useful life 212
Franchise 226
Goodwill 226
Historical cost concept 211
Intangible assets 210
Long-term operational
assets 208
Natural resources 210
Patent 225
Property, plant, and
equipment 210
Relative fair market value
method 211
Revenue expenditures 222
Salvage value 212
Straight-line depreciation 213
Tangible assets 210
Trademark 224
Units-of-production
depreciation 219
QUESTIONS
1. What is the difference between the functions of long-term
operational assets and investments?
2. What is the difference between tangible and intangible
assets? Give an example of each.
3. What is the difference between goodwill and specifically
identifiable intangible assets?
4. Define depreciation. What kind of asset depreciates?
5.
6.
7.
8.
Why are natural resources called wasting assets?
Is land a depreciable asset? Why or why not?
Define amortization. What kind of assets are amortized?
Explain the historical cost concept as it applies to longterm operational assets. Why is the book value of an asset
likely to be different from the current market value of the
asset?
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Accounting for Long-Term Operational Assets
9. What different kinds of expenditures might be included in
the recorded cost of a building?
10. What is a basket purchase of assets? When a basket purchase is made, how is cost assigned to individual assets?
11. What are the stages in the life cycle of a long-term operational asset?
12. Explain straight-line, units-of-production, and doubledeclining-balance depreciation. When is it appropriate to
use each of these depreciation methods?
13. What effect does the recognition of depreciation expense
have on total assets? On total equity?
14. Does the recognition of depreciation expense affect cash
flows? Why or why not?
15. MalMax purchased a depreciable asset. What would be the
difference in total assets at the end of the first year if
MalMax chooses straight-line depreciation versus doubledeclining-balance depreciation?
16. John Smith mistakenly expensed the cost of a long-term
tangible fixed asset. Specifically, he charged the cost of a
truck to a delivery expense account. How will this error
affect the income statement and the balance sheet in the
year in which the mistake is made?
17. What is salvage value?
18. What type of account (classification) is Accumulated
Depreciation?
19. How is the book value of an asset determined?
20. Why is depreciation that has been recognized over the life
of an asset shown in a contra account? Why not just reduce
the asset account?
21. Assume that a piece of equipment cost $5,000 and had
accumulated depreciation recorded of $3,000. What is
the book value of the equipment? Is the book value
equal to the fair market value of the equipment?
Explain.
22. Why would a company choose to depreciate one piece of
equipment using the double-declining-balance method and
another piece of equipment using straight-line depreciation?
23. Why may it be necessary to revise the estimated life of a
plant asset? When the estimated life is revised, does it
affect the amount of depreciation per year? Why or why
not?
24. How are capital expenditures made to improve the quality
of a capital asset accounted for? Would the answer change
if the expenditure extended the life of the asset but did
not improve quality? Explain.
25. When a long-term operational asset is sold at a gain, how
is the balance sheet affected? Is the statement of cash flows
affected? If so, how?
26. Define depletion. What is the most commonly used method
of computing depletion?
27. List several common intangible assets. How is the life
determined that is to be used to compute amortization?
28. List some differences between U.S. GAAP and GAAP of
other countries.
29. How do differences in expense recognition and industry
characteristics affect financial performance measures?
EXERCISES
All applicable Exercises are available with McGraw-Hill
Connect Accounting.
Unless specifically included, ignore income tax considerations in all exercises and problems.
Exercise 6-1
Long-term operational assets used in a business
LO 1
Required
Give some examples of long-term operational assets that each of the following companies is
likely to own: (a) Chico’s, (b) John Deere, (c) Amtrak, and (d) Malco Theatre.
Exercise 6-2
Identifying long-term operational assets
Required
Which of the following items should be classified as long-term operational assets?
a.
b.
c.
d.
e.
f.
Prepaid insurance
Coal mine
Office equipment
Notes receivable (short-term)
Supplies
Copyright
g.
h.
i.
j.
k.
l.
233
Delivery van
Land held for investment
10-year treasury note
Cash
Filing cabinet
Inventory
LO 1
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Chapter 6
LO 1
Exercise 6-3 Classifying tangible and intangible assets
Required
Identify each of the following long-term operational assets as either tangible (T) or intangible (I).
a.
b.
c.
d.
e.
f.
LO 2
Pizza oven
Land
Franchise
Filing cabinet
Copyright
Silver mine
g.
h.
i.
j.
k.
l.
Office building
Drill press
Patent
Oil well
Desk
Goodwill
Exercise 6-4 Determining the cost of an asset
Pine Logging Co. purchased an electronic saw to cut various types and sizes of logs. The saw
had a list price of $160,000. The seller agreed to allow a 5 percent discount because Pine paid
cash. Delivery terms were FOB shipping point. Freight cost amounted to $4,200. Pine had to
hire an individual to operate the saw. Pine had to build a special platform to mount the saw.
The cost of the platform was $2,500. The saw operator was paid an annual salary of $65,000.
The cost of the company’s theft insurance policy increased by $2,000 per year as a result of
the acquisition of the saw. The saw had a four-year useful life and an expected salvage value
of $10,000.
Required
Determine the amount to be capitalized in an asset account for the purchase of the saw.
LO 2
Exercise 6-5 Allocating costs on the basis of relative market values
Illinois Company purchased a building and the land on which the building is situated for
a total cost of $1,200,000 cash. The land was appraised at $600,000 and the building at
$1,000,000.
Required
a. What is the accounting term for this type of acquisition?
b. Determine the amount of the purchase cost to allocate to the land and the amount to
allocate to the building.
c. Would Illinois Company recognize a gain on the purchase? Why or why not?
d. Record the purchase in a statements model like the following one.
Assets
5 Liab. 1 Equity
Rev. 2 Exp. 5 Net Inc.
Cash Flow
Cash 1 Land 1 Building
LO 2
Exercise 6-6 Allocating costs for a basket purchase
Keenum Company purchased a restaurant building, land, and equipment for $900,000. Keenum
paid $100,000 in cash and issued a 20-year, 8 percent note to First Bank for the balance. The
appraised value of the assets was as follows.
Land
Building
Equipment
Total
$ 240,000
600,000
360,000
$1,200,000
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235
Required
a. Compute the amount to be recorded on the books for each of the assets.
b. Record the purchase in a horizontal statements model like the following one.
5
Assets
Cash
1
1
Land
Exercise 6-7
Building
1
Equip.
Liab.
1
Equity
Rev.
2
Exp.
5
Net Inc.
Cash Flow
N. Payable
Effect of depreciation on the accounting equation and financial
statements
LO 3
The following events apply to R&L Logging Company for the 2010 fiscal year.
1.
2.
3.
4.
5.
6.
The company started when it acquired $80,000 cash from the issue of common stock.
Purchased a new skidder that cost $75,000 cash.
Earned $98,000 in cash revenue.
Paid $52,000 cash for salaries expense.
Paid $12,000 cash for operating expenses.
Adjusted the records to reflect the use of the skidder. The skidder, purchased on January 1,
2010, has an expected useful life of five years and an estimated salvage value of $5,000.
Use straight-line depreciation. The adjusting entry was made as of December 31, 2010.
Required
a. Record the above transactions in a horizontal statements model like the following one.
Balance Sheet
Event
5
Assets
Cash
1
Equip.
Income Statement
2
A. Depr.
5
Equity
Com.
Stock
1
Rev.
2
Exp.
5
Net Inc.
Statemt. of
Cash Flows
Ret.
Earn.
b. What amount of depreciation expense would R&L Logging Co. report on the 2011 income
statement?
c. What amount of accumulated depreciation would R&L Logging Co. report on the December 31, 2011, balance sheet?
d. Would the cash flow from operating activities be affected by depreciation in 2011?
Exercise 6-8
Effect of double-declining-balance depreciation on financial statements
LO 3
Miller Company started operations by acquiring $200,000 cash from the issue of common
stock. The company purchased equipment that cost $200,000 cash on January 1, 2010. The
equipment had an expected useful life of five years and an estimated salvage value of $20,000.
Miller Company earned $92,000 and $76,000 of cash revenue during 2010 and 2011, respectively. Miller Company uses double-declining-balance depreciation.
Required
a. Record the above transactions in a horizontal statements model like the following one.
Balance Sheet
Event
5
Assets
Cash
1
Equip.
Income Statement
2
A. Depr.
5
Equity
Com.
Stock
1
Rev.
Ret.
Earn.
2
Exp.
5
Net Inc.
Statemt. of
Cash Flows
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Chapter 6
b. Prepare income statements, balance sheets, and statements of cash flows for 2010 and 2011.
Use a vertical statements format.
Exercise 6-9
LO 3, 4
Events related to the acquisition, use, and disposal of a tangible
plant asset: straight-line depreciation
Cook Wrecker Co. purchased a truck on January 1, 2010, for $37,000. In addition, Cook paid
sales tax and title fees of $2,000 for the truck. The truck is expected to have a four-year life
and a salvage value of $7,000.
Required
a. Using the straight-line method, compute the depreciation expense for 2010 and 2011.
b. Assume the truck was sold on January 1, 2013, for $15,000. Determine the amount of gain
or loss that would be recognized on the asset disposal.
Exercise 6-10
LO 3
Computing and recording straight-line versus double-decliningbalance depreciation
At the beginning of 2009, Expert Manufacturing purchased a new computerized drill press for
$65,000. It is expected to have a five-year life and a $5,000 salvage value.
Required
a. Compute the depreciation for each of the five years, assuming that the company uses
(1) Straight-line depreciation.
(2) Double-declining-balance depreciation.
b. Record the purchase of the drill press and the depreciation expense for the first year under
the straight-line and double-declining-balance methods in a financial statements model like
the following one.
Assets
Cash
1
LO 4
Drill Press
2
Acc. Dep.
Exercise 6-11
5
Equity
5
Ret. Earn
Rev.
2
Exp.
5
Net Inc.
Cash Flow
Effect of the disposal of plant assets on the financial statements
A plant asset with a cost of $50,000 and accumulated depreciation of $42,000 is sold for $6,000.
Required
What is the book value of the asset at the time of sale?
What is the amount of gain or loss on the disposal?
How would the sale affect net income (increase, decrease, no effect) and by how much?
How would the sale affect the amount of total assets shown on the balance sheet (increase,
decrease, no effect) and by how much?
e. How would the event affect the statement of cash flows (inflow, outflow, no effect) and in
what section?
a.
b.
c.
d.
LO 4
Exercise 6-12
Effect of gains and losses on the accounting equation and financial
statements
On January 1, 2010, Reese Enterprises purchased a parcel of land for $22,000 cash. At the
time of purchase, the company planned to use the land for future expansion. In 2011, Reese
Enterprises changed its plans and sold the land.
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Accounting for Long-Term Operational Assets
Required
a. Assume that the land was sold for $25,000 in 2010.
(1) Show the effect of the sale on the accounting equation.
(2) What amount would Reese report on the income statement related to the sale of the
land?
(3) What amount would Reese report on the statement of cash flows related to the sale of
the land?
b. Assume that the land was sold for $21,500 in 2011.
(1) Show the effect of the sale on the accounting equation.
(2) What amount would Reese report on the income statement related to the sale of the
land?
(3) What amount would Reese report on the statement of cash flows related to the sale of
the land?
Exercise 6-13
Double-declining-balance and units-of-production depreciation:
gain or loss on disposal
LO 3, 4
Copy Service Co. purchased a new color copier at the beginning of 2010 for $42,000. The
copier is expected to have a five-year useful life and a $6,000 salvage value. The expected copy
production was estimated at 2,000,000 copies. Actual copy production for the five years was
as follows.
2010
2011
2012
2013
2014
Total
550,000
480,000
380,000
390,000
240,000
2,040,000
The copier was sold at the end of 2014 for $5,200.
Required
a. Compute the depreciation expense for each of the five years, using double-declining-balance
depreciation.
b. Compute the depreciation expense for each of the five years, using units-of-production
depreciation. (Round cost per unit to three decimal places.)
c. Calculate the amount of gain or loss from the sale of the asset under each of the depreciation methods.
Exercise 6-14
Revision of estimated useful life
LO 5
On January 1, 2010, Miller Machining Co. purchased a compressor and related installation
equipment for $56,000. The equipment had a three-year estimated life with a $5,000 salvage
value. Straight-line depreciation was used. At the beginning of 2012, Miller revised the expected
life of the asset to four years rather than three years. The salvage value was revised to $4,000.
Required
Compute the depreciation expense for each of the four years.
Exercise 6-15 Distinguishing between revenue expenditures and capital
expenditures
Uber’s Shredding Service has just completed a minor repair on a shredding machine. The repair
cost was $1,200, and the book value prior to the repair was $5,000. In addition, the company
spent $9,000 to replace the roof on a building. The new roof extended the life of the building
LO 6
237
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Chapter 6
by five years. Prior to the roof replacement, the general ledger reflected the Building account
at $90,000 and related Accumulated Depreciation account at $36,000.
Required
After the work was completed, what book value should Uber’s report on the balance sheet for
the shredding machine and the building?
Exercise 6-16 Effect of revenue expenditures versus capital expenditures on
financial statements
LO 6
Commercial Construction Company purchased a forklift for $115,000 cash. It had an estimated
useful life of four years and a $5,000 salvage value. At the beginning of the third year of use,
the company spent an additional $10,000 that was related to the forklift. The company’s financial condition just prior to this expenditure is shown in the following statements model.
5
Assets
Equity
Cash
1
Forklift
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
12,000
1
115,000
2
55,000
5
24,000
1
48,000
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
NA
5
NA
NA
Required
Record the $10,000 expenditure in the statements model under each of the following independent assumptions.
a. The expenditure was for routine maintenance.
b. The expenditure extended the forklift’s life.
c. The expenditure improved the forklift’s operating capacity.
LO 6
Exercise 6-17
Effect of revenue expenditures versus capital expenditures on
financial statements
On January 1, 2010, Grayson Construction Company overhauled four cranes resulting in a
slight increase in the life of the cranes. Such overhauls occur regularly at two-year intervals
and have been treated as maintenance expense in the past. Management is considering whether
to capitalize this year’s $26,000 cash cost in the Cranes asset account or to expense it as a
maintenance expense. Assume that the cranes have a remaining useful life of two years and
no expected salvage value. Assume straight-line depreciation.
Required
a. Determine the amount of additional depreciation expense Grayson would recognize in 2010
and 2011 if the cost were capitalized in the Cranes account.
b. Determine the amount of expense Grayson would recognize in 2010 and 2011 if the cost
were recognized as maintenance expense.
c. Determine the effect of the overhaul on cash flow from operating activities for 2010 and
2011 if the cost were capitalized and expensed through depreciation charges.
d. Determine the effect of the overhaul on cash flow from operating activities for 2010 and
2011 if the cost were recognized as maintenance expense.
LO 7
Exercise 6-18
Computing and recording depletion expense
Southwest Sand and Gravel paid $800,000 to acquire 1,000,000 cubic yards of sand reserves.
The following statements model reflects Southwest’s financial condition just prior to purchasing the sand reserves. The company extracted 420,000 cubic yards of sand in year 1 and 360,000
cubic yards in year 2.
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5
Assets
Equity
Cash
1
Sand Res.
5
Com. Stk.
1
Ret. Earn.
900,000
1
NA
5
900,000
1
NA
239
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
NA
5
NA
NA
Required
a. Compute the depletion charge per unit.
b. Record the acquisition of the sand reserves and the depletion expense for years 1 and 2 in
a financial statements model like the preceding one.
Exercise 6-19
Computing and recording the amortization of intangibles
LO 8
Nevada’s Manufacturing paid cash to purchase the assets of an existing company. Among the
assets purchased were the following items.
Patent with 5 remaining years of legal life
Goodwill
$32,000
36,000
Nevada’s financial condition just prior to the purchase of these assets is shown in the following statements model:
Assets
Cash
1
Patent
1
Goodwill
94,000
1
NA
1
NA
5
Liab.
1
Equity
Rev.
2
Exp.
5
Net Inc.
Cash Flow
5
NA
1
94,000
NA
2
NA
5
NA
NA
Required
a. Compute the annual amortization expense for these items if applicable.
b. Record the purchase of the intangible assets and the related amortization expense for year 1
in a horizontal statements model like the preceding one.
Exercise 6-20
Computing and recording goodwill
LO 8
Ben Sands purchased the business Regional Supply Co. for $285,000 cash and assumed all
liabilities at the date of purchase. Regional’s books showed assets of $280,000, liabilities of
$40,000, and equity of $240,000. An appraiser assessed the fair market value of the tangible
assets at $270,000 at the date of purchase. Sands’s financial condition just prior to the purchase
is shown in the following statements model.
Assets
Cash
1
Assets
1
Goodwill
325,000
1
NA
1
NA
5
Liab.
1
Equity
Rev.
2
Exp.
5
Net Inc.
Cash Flow
5
NA
1
325,000
NA
2
NA
5
NA
NA
Required
a. Compute the amount of goodwill purchased.
b. Record the purchase in a financial statements model like the preceding one.
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Chapter 6
LO 9
Exercise 6-21
Performing ratio analysis using real-world data
American Greetings Corporation manufactures and sells greeting cards and related items such
as gift wrapping paper. CSX Corporation is one of the largest railway networks in the nation.
The following data were taken from one of the companies’ December 28, 2007, annual report
and from the other’s February 28, 2007, annual report. Revealing which data relate to which
company was intentionally omitted. For one company, the dollar amounts are in thousands,
while for the other they are in millions.
Sales
Depreciation costs
Net earnings
Current assets
Property, plant, and equipment
Total assets
Company 1
Company 2
$10,030
883
1,336
2,491
21,780
$25,534
$1,744,603
46,975
42,378
799,281
285,072
$1,778,214
Required
a. Calculate depreciation costs as a percentage of sales for each company.
b. Calculate property, plant, and equipment as a percentage of total assets for each company.
c. Based on the information now available to you, decide which data relate to which company.
Explain the rationale for your decision.
d. Which company appears to be using its assets most efficiently? Explain your answer.
PROBLEMS
All applicable Problems are available with McGraw-Hill
Connect Accounting.
LO 2
CHECK FIGURES
Total cost of equipment: $62,600
Cost allocated to copier: $7,500
Problem 6-22
Accounting for acquisition of assets including a basket purchase
Moon Co., Inc., made several purchases of long-term assets in 2010. The details of each purchase are presented here.
New Office Equipment
1.
2.
3.
4.
5.
List price: $60,000; terms: 2/10 n/30; paid within discount period.
Transportation-in: $1,600.
Installation: $2,200.
Cost to repair damage during unloading: $1,000.
Routine maintenance cost after six months: $300.
Basket Purchase of Copier, Computer, and Scanner for $15,000 with Fair Market Values
1. Copier, $10,000.
2. Computer, $6,000.
3. Scanner, $4,000.
Land for New Warehouse with an Old Building Torn Down
1.
2.
3.
4.
5.
Purchase price, $200,000.
Demolition of building, $10,000.
Lumber sold from old building, $7,000.
Grading in preparation for new building, $14,000.
Construction of new building, $500,000.
Required
In each of these cases, determine the amount of cost to be capitalized in the asset accounts.
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Problem 6-23
Accounting for depreciation over multiple accounting cycles:
straight-line depreciation
LO 3, 4
NEC Company began operations when it acquired $60,000 cash from the issue of common
stock on January 1, 2008. The cash acquired was immediately used to purchase equipment for
$60,000 that had a $5,000 salvage value and an expected useful life of four years. The equipment was used to produce the following revenue stream (assume all revenue transactions are
for cash). At the beginning of the fifth year, the equipment was sold for $4,500 cash. NEC
uses straight-line depreciation.
Revenue
2008
2009
2010
2011
2012
$15,000
$16,000
$16,400
$14,000
$0
241
CHECK FIGURES
Net Income, 2008: $1,250
Total Assets, 2012: $65,900
Required
Prepare income statements, statements of changes in stockholders’ equity, balance sheets, and
statements of cash flows for each of the five years.
Problem 6-24
Purchase and use of tangible asset: three accounting cycles,
double-declining-balance depreciation
LO 2, 3, 5, 6
The following transactions pertain to ALFA Solutions, Inc. Assume the transactions for the
purchase of the computer and any capital improvements occur on January 1 each year.
2010
CHECK FIGURES
b. Net Income, 2010: $25,400
Total Assets, 2012: $127,860
1. Acquired $50,000 cash from the issue of common stock.
2. Purchased a computer system for $30,000. It has an estimated useful life of five years and
a $5,000 salvage value.
3. Paid $2,000 sales tax on the computer system.
4. Collected $40,000 in data entry fees from clients.
5. Paid $1,800 in fees to service the computers.
6. Recorded double-declining-balance depreciation on the computer system for 2010.
2011
1. Paid 1,000 for repairs to the computer system.
2. Bought a case of toner cartridges for the printers that are part of the computer system,
$1,500.
3. Collected $38,000 in data entry fees from clients.
4. Paid $1,100 in fees to service the computers.
5. Recorded double-declining-balance depreciation for 2011.
2012
1. Paid $4,800 to upgrade the computer system, which extended the total life of the system
to six years.
2. Paid $1,100 in fees to service the computers.
3. Collected $35,000 in data entry fees from clients.
4. Recorded double-declining-balance depreciation for 2012.
Required
a. Record the above transactions in a horizontal statements model like the following one.
Balance Sheet
Event
5
Assets
Cash
1
Equip.
Income Statement
2
A. Depr.
5
Equity
Com.
Stock
1
Rev.
Ret.
Earn.
b. Use a vertical model to present financial statements for 2010, 2011, and 2012.
2
Exp.
5
Net Inc.
Statemt. of
Cash Flows
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Chapter 6
Problem 6-25
LO 3
CHECK FIGURES
b. Depreciation Expense, 2011:
$4,600
c. Depreciation Expense, 2012:
$4,625
Calculating depreciation expense using three different methods
Swanson Service Company purchased a copier on January 1, 2011, for $18,000 and paid an
additional $500 for delivery charges. The copier was estimated to have a life of four years or
800,000 copies. Salvage was estimated at $2,500. The copier produced 230,000 copies in 2011
and 250,000 copies in 2012.
Required
Compute the amount of depreciation expense for the copier for calendar years 2011 and 2012,
using these methods.
a. Straight-line.
b. Units-of-production.
c. Double-declining-balance.
Problem 6-26
LO 3, 4
CHECK FIGURES
a. Depreciation Expense, Year 2:
$8,000
b. Depreciation Expense, Year 2:
$10,800
One Hour Laundry Services purchased a new steam press machine on January 1, for $45,000.
It is expected to have a five-year useful life and a $5,000 salvage value. One Hour expects to
use the equipment more extensively in the early years.
Required
a. Calculate the depreciation expense for each of the five years, assuming the use of straightline depreciation.
b. Calculate the depreciation expense for each of the five years, assuming the use of doubledeclining-balance depreciation.
c. Would the choice of one depreciation method over another produce a different amount of
annual cash flow for any year? Why or why not?
d. Assume that One Hour Laundry Services sold the steam press machine at the end of the
third year for $26,000. Compute the amount of gain or loss using each depreciation method.
Problem 6-27
LO 3, 4
Effect of straight-line versus double-declining-balance depreciation
on the recognition of expense and gains or losses
Computing and recording units-of-production depreciation
Brees Corporation purchased a delivery van for $35,500 in 2010. The firm’s financial condition
immediately prior to the purchase is shown in the following horizontal statements model.
5
Assets
Equity
Cash
1
Van
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
50,000
1
NA
2
NA
5
50,000
1
NA
CHECK FIGURES
a. Depreciation Expense, 2010:
$10,000
c. Loss on Sale: $(1,500)
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
NA
5
NA
NA
The van was expected to have a useful life of 150,000 miles and a salvage value of $5,500.
Actual mileage was as follows.
2010
2011
2012
50,000
70,000
58,000
Required
a. Compute the depreciation for each of the three years, assuming the use of units-of-production
depreciation.
b. Assume that Brees earns $21,000 of cash revenue during 2010. Record the purchase of the
van and the recognition of the revenue and the depreciation expense for the first year in a
financial statements model like the preceding one.
c. Assume that Brees sold the van at the end of the third year for $4,000. Calculate the
amount of gain or lose from the sale.
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Problem 6-28
Determining the effect of depreciation expense on financial statements
Three different companies each purchased a machine on January 1, 2008, for $42,000. Each
machine was expected to last five years or 200,000 hours. Salvage value was estimated to be
$2,000. All three machines were operated for 50,000 hours in 2008, 55,000 hours in 2009,
40,000 hours in 2010, 44,000 hours in 2011, and 31,000 hours in 2012. Each of the three
companies earned $30,000 of cash revenue during each of the five years. Company A uses
straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation.
243
LO 3
CHECK FIGURES
a. Company A, Net Income:
$22,000
c. Company A, Highest Book
Value: $18,000
Required
Answer each of the following questions. Ignore the effects of income taxes.
Which company will report the highest amount of net income for 2008?
Which company will report the lowest amount of net income for 2010?
Which company will report the highest book value on the December 31, 2010, balance sheet?
Which company will report the highest amount of retained earnings on the December 31,
2011, balance sheet?
e. Which company will report the lowest amount of cash flow from operating activities on
the 2010 statement of cash flows?
a.
b.
c.
d.
Problem 6-29
Accounting for depletion
Favre Exploration Corporation engages in the exploration and development of many types of
natural resources. The company has engaged in the following activities:
Jan. 1, 2010
Feb. 1, 2010
July 1, 2010
Aug. 1, 2010
Purchased a coal mine estimated to contain 200,000 tons of coal for $900,000.
Purchased a silver mine estimated to contain 30,000 tons of silver for $750,000.
Purchased for $2,500,000 a tract of timber estimated to yield 3,000,000 board
feet of lumber and to have a residual land value of $250,000.
Purchased for $720,000 oil reserves estimated to contain 380,000 barrels of oil,
of which 20,000 would be unprofitable to pump.
LO 7
CHECK FIGURES
a. Coal Mine Depletion, 2010:
$279,000
b. Total Natural Resources:
$3,056,000
Required
a. Determine the amount of depletion expense to recognize on the 2010 income statement
for each of the four reserves, assuming 62,000 tons of coal, 1,200,000 board feet of lumber,
9,000 tons of silver, and 80,000 barrels of oil are extracted.
b. Prepare the portion of the December 31, 2010, balance sheet that reports natural resources.
Problem 6-30
Recognizing continuing expenditures for plant assets
Sam’s Outdoor, Inc., recorded the following transactions over the life of a piece of equipment
purchased in 2010.
Jan. 1, 2010
Dec. 31, 2010
May 5, 2011
Dec. 31, 2011
Jan. 1, 2012
Dec. 31, 2012
Mar. 1, 2013
Dec. 31, 2013
Jan. 1, 2014
Dec. 31, 2014
July 1, 2015
Purchased the equipment for $39,000 cash. The equipment is estimated to have
a five-year life and $4,000 salvage value and was to be depreciated using the
straight-line method.
Recorded depreciation expense for 2010.
Undertook routine repairs costing $800.
Recorded depreciation expense for 2011.
Made an adjustment costing $3,000 to the equipment. It improved the quality
of the output but did not affect the life estimate.
Recorded depreciation expense for 2012.
Incurred $520 cost to oil and clean the equipment.
Recorded depreciation expense for 2013.
Had the equipment completely overhauled at a cost of $9,000. The overhaul
was estimated to extend the total life to seven years and revised the salvage
value to $3,000.
Recorded depreciation expense for 2014.
Sold the equipment for $8,000 cash.
LO 3, 4, 5, 6
CHECK FIGURES
b. 2012 Depreciation Expense:
$8,000
d. Loss on Sale: $4,000
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Required
a. Use a horizontal statements model like the following one to show the effects of these
transactions on the elements of the financial statements. Use 1 for increase, 2 for decrease,
and NA for not affected. The first event is recorded as an example.
Date
Assets
Jan. 1, 2010
12
5
Liabilities
1
Equity
Net Inc.
NA
NA
NA
Cash Flow
2
IA
b. Determine the amount of depreciation expense Sam’s will report on the income statements
for the years 2010 through 2014.
c. Determine the book value (cost 2 accumulated depreciation) Sam’s will report on the balance sheets at the end of the years 2010 through 2014.
d. Determine the amount of the gain or loss Sam’s will report on the disposal of the equipment on July 1, 2015.
Problem 6-31
LO 5, 6, 7
CHECK FIGURE
Depreciation Expense: $8,500
Accounting for continuing expenditures
Shaw Manufacturing paid $62,000 to purchase a computerized assembly machine on January 1,
2008. The machine had an estimated life of eight years and a $2,000 salvage value. Shaw’s
financial condition as of January 1, 2011, is shown in the following financial statements model.
Shaw uses the straight-line method for depreciation.
5
Assets
Equity
Cash
1
Mach.
2
Acc. Dep.
5
Com. Stk.
1
Ret. Earn.
15,000
1
62,000
2
22,500
5
8,000
1
46,500
Rev.
2
Exp.
5
Net Inc.
Cash Flow
NA
2
NA
5
NA
NA
Shaw Manufacturing made the following expenditures on the computerized assembly
machine in 2011.
Jan. 2
Aug. 1
Oct. 2
Dec. 31
Added an overdrive mechanism for $6,000 that would improve the overall quality of
the performance of the machine but would not extend its life. The salvage value was
revised to $3,000.
Performed routine maintenance, $1,150.
Replaced some computer chips (considered routine), $950.
Recognized 2011 depreciation expense.
Required
Record the 2011 transactions in a statements model like the preceding one.
LO 8
CHECK FIGURE
Goodwill Purchased: $210,000
Problem 6-32
Accounting for intangible assets
Le Gormet Company purchased a fast-food restaurant for $1,700,000. The fair market values
of the assets purchased were as follows. No liabilities were assumed.
Equipment
Land
Building
Franchise (5-year life)
Required
Calculate the amount of goodwill purchased.
$420,000
300,000
650,000
120,000
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Problem 6-33
Accounting for goodwill
LO 8
Green Leaf purchased the assets of Flower Co. for $1,200,000 in 2010. The estimated fair
market value of the assets at the purchase date was $1,000,000. Goodwill of $200,000 was
recorded at purchase. In 2012, because of negative publicity, one-half of the goodwill purchased from Flower Co. was judged to be permanently impaired.
CHECK FIGURE
Impairment Loss: $100,000
Required
Explain how the recognition of the impairment of the goodwill will affect the 2012 balance
sheet, income statement, and statement of cash flows.
Problem 6-34
Performing ratio analysis using real-world data
LO 9
Cooper Tire Rubber Company claims to be the fourth largest tire manufacturer in North America.
Goodyear Tire & Rubber Company is the largest tire manufacturer in North America. The following information was taken from these companies’ December 31, 2007, annual reports. All
dollar amounts are in thousands.
Sales
Depreciation costs
Buildings, machinery, and equipment
(net of accumulated depreciation)
Total assets
Depreciation method
Estimated life of assets:
Buildings
Machinery and equipment
Cooper Tire
Goodyear Tire
$2,932,575
131,007
$19,644,000
610,000
949,458
2,296,868
“Straight-line or
accelerated”
4,383,000
17,028,000
Straight-line
10 to 40 years
4 to 14 years
8 to 45 years
3 to 30 years
Required
a. Calculate depreciation costs as a percentage of sales for each company.
b. Calculate buildings, machinery, and equipment as a percentage of total assets for each
company.
c. Which company appears to be using its assets most efficiently? Explain your answer.
d. Identify some of the problems a financial analyst encounters when trying to compare the
use of long-term assets of Cooper versus Goodyear.
ANALYZE, THINK, COMMUNICATE
ATC 6-1
Business Applications Case
Understanding real-world annual reports
Required
Use the Topps Company’s annual report in Appendix B to answer the following questions.
What method of depreciation does Topps use?
What types of intangible assets does Topps have?
What are the estimated lives that Topps uses for the various types of long-term assets?
As of February 25, 2006, what is the original cost of Topps’: Land; Buildings and improvements; and Machinery, equipment and software (see the footnotes)?
e. What was Topps’ depreciation expense and amortization expense for 2006 (see the footnotes)?
a.
b.
c.
d.
The Topps Company, Inc.
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ATC 6-2 Group Assignment
Different depreciation methods
Sweet’s Bakery makes cakes, pies, and other pastries that it sells to local grocery stores. The company experienced the following transactions during 2010.
Started business by acquiring $60,000 cash from the issue of common stock.
Purchased bakery equipment for $46,000.
Had sales in 2010 amounting to $42,000.
Paid $8,200 of cash for supplies which were all used during the year to make baked
goods.
5. Incurred other operating expenses of $12,000 for 2010.
1.
2.
3.
4.
Required
a. Organize the class into two sections and divide each section into groups of three to five
students. Assign each section a depreciation method: straight-line or double-decliningbalance.
Group Task
Prepare an income statement and balance sheet using the preceding information and the depreciation method assigned to your group.
Class Discussion
b. Have a representative of each section put its income statement on the board. Are there
differences in net income? In the amount of income tax paid? How will these differences
in the amount of depreciation expense change over the life of the equipment?
ATC 6-3 Real-World Case
Different numbers for different industries
The following ratios are for four companies in different industries. Some of these ratios have
been discussed in the textbook; others have not, but their names explain how the ratio was computed. The four sets of ratios, presented randomly, are
Ratio
Current assets 4 total assets
Operating cycle
Return on assets
Gross margin
Sales 4 property, plant and equipment
Sales 4 number of full-time employees
Company 1
Company 2
Company 3
12%
42 days
12%
35%
1.89 times
$540,883
18%
35 days
19%
55%
38.97 times
$29,942
20%
19 days
5%
46%
1.97 times
$55,687
Company 4
72%
409 days
5%
24%
6.08 times
$413,252
The four companies to which these ratios relate, listed in alphabetical order, are
1. Anheuser Bush Companies, Inc., is a company that produces beer and related products. Its
fiscal year-end was December 31, 2007.
2. Wendy’s International, Inc., operates 1,414 of the 6,645 Wendy’s restaurants in the United
States and 19 other countries. Its fiscal year-end was December 30, 2007.
3. Deere & Company is a company that manufactures heavy construction equipment. Its fiscal
year-end was December 31, 2007.
4. Weight Watchers International, Inc., is a company that provides weight loss services and
products. Its fiscal year-end was December 31, 2007.
Required
Determine which company should be matched with each set of ratios. Write a memorandum
explaining the rationale for your decisions.
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Accounting for Long-Term Operational Assets
ATC 6-4
Business Applications Case
Effect of depreciation on the return on assets
ratio
Campus Video Games (CVG) was started on January 1, 2010, when it acquired $62,500 cash
from the issue of common stock. The company immediately purchased video games that cost
$62,500 cash. The games had an estimated salvage value of $7,500 and an expected useful life of
five years. CVG used the games during 2010 to produce $25,000 of cash revenue. Assume that
these were the only events affecting CVG during 2010.
Required
(Hint: Prepare an income statement and a balance sheet prior to completing the following
requirements.)
a. Compute the return on assets ratio as of December 31, 2010, assuming CVG uses the
straight-line depreciation method.
b. Recompute the ratio assuming CVG uses the double-declining-balance method.
c. Which depreciation method makes it appear that CVG is utilizing its assets more effectively?
ATC 6-5
Business Applications Case
Effect of depreciation on financial statement
analysis: straight-line versus double-decliningbalance
Rucky Company and Stone Company experienced the exact same set of economic events
during 2010. Both companies purchased machines on January 1, 2010. Except for the effects
of this purchase, the accounting records of both companies had the following accounts and
balances.
As of January 1, 2010
Total Assets
Total Liabilities
Total Stockholders’ Equity
During 2010
Total Sales Revenue
Total Expenses (not including depreciation)
Liabilities were not affected by transactions in 2010.
$400,000
160,000
240,000
200,000
120,000
The machines purchased by the companies each cost $80,000 cash. The machines had expected useful lives of five years and estimated salvage values of $8,000. Rucky uses straight-line
depreciation. Stone uses double-declining-balance depreciation.
Required
a. For both companies, calculate the balances in the preceding accounts on December 31,
2010, after the effects of the purchase and depreciation of the machines have been applied.
[Hint: The purchases of the machines are asset exchange transactions that do not affect
total assets. However, the effect of depreciating the machines changes the amounts in total
assets, expense, and equity (retained earnings).]
b. Based on the revised account balances determined in Requirement a, calculate the following ratios for both companies.
(1) Debt to assets ratio.
(2) Return on assets ratio.
(3) Return on equity ratio.
c. Disregarding the effects of income taxes, which company produced the higher increase in
real economic wealth during 2010?
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Chapter 6
ATC 6-6 Writing Assignment
Impact of historical cost on asset presentation on the
balance sheet
Assume that you are examining the balance sheets of two companies and note the following
information.
Equipment
Accumulated Depreciation
Book Value
Company A
Company B
$1,130,000
(730,000)
$ 400,000
$900,000
(500,000)
$400,000
Maxie Smith, a student who has had no accounting courses, remarks that Company A and
Company B have the same amount of equipment.
Required
In a short paragraph, explain to Maxie that the two companies do not have equal amounts of
equipment. You may want to include in your discussion comments regarding the possible age of
each company’s equipment, the impact of the historical cost concept on balance sheet information, and the impact of different depreciation methods on book value.
ATC 6-7 Corporate Governance
o
p
r
What’s an expense?
Several years ago, Wilson Blowhard founded a communications company. The company became
successful and grew by expanding its customer base and acquiring some of its competitors. In
fact, most of its growth resulted from acquiring other companies. Mr. Blowhard is adamant
about continuing the company’s growth and increasing its net worth. To achieve these goals, the
business’s net income must continue to increase at a rapid pace.
If the company’s net worth continues to rise, Mr. Blowhard plans to sell the company and
retire. He is, therefore, focused on improving the company’s profit any way he can.
In the communications business, companies often use the lines of other communications
companies. This line usage is a significant operating expense for Mr. Blowhard’s company. Generally accepted accounting principles require operating costs like line use to be expensed as they
are incurred each year. Each dollar of line cost reduces net income by a dollar.
After reviewing the company’s operations, Mr. Blowhard concluded that the company did
not currently need all of the line use it was paying for. It was really paying the owner of the lines
now so that the line use would be available in the future for all of Mr. Blowhard’s expected new
customers. Mr. Blowhard instructed his accountant to capitalize all of the line cost charges and
depreciate them over 10 years. The accountant reluctantly followed Mr. Blowhard’s instructions
and the company’s net income for the current year showed a significant increase over the prior
year’s net income. Mr. Blowhard had found a way to report continued growth in the company’s
net income and increase the value of the company.
Required
a. How does Mr. Blowhard’s scheme affect the amount of income that the company would
otherwise report in its financial statements and how does the scheme affect the company’s
balance sheet? Explain your answer.
b. Review the AICPA’s Articles of Professional Conduct (see Chapter 2) and comment on any
of the standards that were violated.
c. Review the fraud triangle discussed in Chapter 2 and comment on which of the features
are evident in this case.
ATC 6-8 Research Assignment
Comparing Microsoft’s and Intel’s operational assets
This chapter discussed how companies in different industries often use different proportions of
current versus long-term assets to accomplish their business objective. The technology revolution
resulting from the silicon microchip has often been led by two well-known companies: Microsoft
and Intel. Although often thought of together, these companies are really very different. Using
either the most current Forms 10-K or annual reports for Microsoft Corporation and Intel
Corporation, complete the requirements below. To obtain the Forms 10-K, use either the
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Accounting for Long-Term Operational Assets
EDGAR system following the instructions in Appendix A or the company’s website. Microsoft’s
annual report is available on its website; Intel’s annual report is its Form 10-K.
Required
a. Fill in the missing data in the following table. The percentages must be computed; they are
not included in the companies 10-Ks. (Note: The percentages for current assets and property, plant, and equipment will not sum to 100.)
Current
Assets
Microsoft
Dollar Amount
$
% of Total Assets
$
%
% of Total Assets
Intel
Dollar Amount
Property, Plant,
and Equipment
$
$
%
$
%
Total Assets
100%
$
%
100%
b. Briefly explain why these two companies have different percentages of their assets in current
assets versus property, plant, and equipment.
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